As big biopharma scrambles to survive the patent cliff, and startups struggle to find financing, companies in each segment have found an alternative in collaborations of several sorts. Traditionally, smaller companies join with the bigger ones to carry out R&D, preclinical work, or trials in exchange for research funding and development and sales milestones.

In some alliances partners offer contract research or manufacturing capabilities to biopharma companies. And there are open-source collaborations in which, typically, the larger companies invite partners to tap into their expertise and facilities while pursuing their own R&D.

What type of collaboration should a company pursue to achieve its research and commercial goals? The short answer is: it depends.

Driving Factors

“I would say that some of that decision-making is driven by the stage of the asset, and some of that is driven by the therapeutic focus of the asset,” Eugene Rozelman, principal at Canaccord Genuity, explained to GEN.

Harry Glorikian, managing partner with Scientia Advisors, added IP and a company’s existing business model to the list of factors that determine whether to pursue a collaboration and which type works best. He told GEN that firms have to look at their IP portfolio within the area in which they’re trying to form partnerships.

Also, the size of the company and the resources it is willing to invest will play a role in the type of deal that gets inked. “The behemoths tend to have more choice. They could have more than one of those models going at the same time. It also depends if the company is publicly traded or not, and how do they want to manage expectations?”

While the diseases that have traditionally driven in-house drug development are also driving collaborations, Glorikian noted that concerns over life-cycle management and emerging economies are also triggering more alliances.

Finally, size of molecule shapes decisions on collaborations, according to Rozelman. Big and specialty pharma are increasingly tapping into the biotech arena as they try to pad their pipelines with large molecules. With such a different skill set required for R&D as well as manufacturing, this is another hot area for collaborations, Rozelman pointed out.

Deal Structure

Considerations that impact whether a deal is signed and what type of a deal it is also drive the structure of a deal. “In a hot space, you can have an early-stage asset getting relatively big dollars, even if the asset is not in the clinic yet,” Rozelman noted. He cited as an example last year’s licensing by Vertex of worldwide rights to two preclinical hepatitis C candidates from Alios Biopharma for $60 million up front. The deal covered ALS-2200 and ALS-2158, and Alios is eligible for an additional $715 million in R&D milestone payments and up to $750 million in sales milestones. Vertex said at the time it expected to pay approximately $35 million in development milestones last year itself.

The major bucks tend to be shelled out more for later-stage drug candidates, though. Once a firm’s done early Phase II work and you’ve seen at least some early positive efficacy signals in your clinical trials, “that typically starts to attract some of the larger pharma,” Rozelman explained. “That’s where you start to see the big dollars, with $100 million-plus up front and a billion-dollar-plus total milestone opportunity.”

Most commonly, firms generate a lot less from a licensing collaboration. “It’s typically in the tens of millions of dollars,” Glorikian noted. “Typically, we’ve been seeing companies that want things that are later on in the pipeline, as opposed to earlier in the pipeline. They seem to be willing to have the smaller companies take the risk of things that are earlier in the pipeline.”

To defray this risk companies often enter discovery alliances where they contract the discovery, research, and preclinical work out to firms focused on these stages of drug development. In exchange for conducting this high-risk work, companies get research funding and milestone fees and of course the stamp from larger firms that their technology works.

Big pharma is also gradually warming up to open collaborations as another way to gain innovative research without making the biggest investment. These open innovation programs have often focused on diseases that do not easily offer the promise of quick profits.

GlaxoSmithKline spent $8 million in 2010 to seed-fund research in tropical diseases through a not-for-profit foundation when it launched its first “Open Lab” outside Madrid. Last fall, Eli Lilly expanded its open-source effort beyond its two-year-old Phenotypic Drug Discovery (PD2) initiative, in which molecules can be submitted by scientists outside the company for screening. Lilly also launched a new target discovery program and expanded its TB Drug Discovery Initiative to screen molecules for their ability to fight MDR-TB.

A New Engine

In many situations, though, partnering has emerged less to accrue knowledge than to cut costs. For example, on January 5, Xoma nixed 36% of its workforce because it had decided that using contract research and manufacturing organizations for more of its work would be more cost-effective.

“For those organizations that have the resources, the cash, etc., they’re in a great situation. They’re in the deal-making position” of setting the terms for collaborations, Glorikian said. “If you can get money from someplace else, you might be willing to stick it out and wait a little longer. But if you don’t have that resource now, if the bank has closed down its credit line to you, you become that much more amenable to working something out.”

He and Rozelman foresee collaborations of all types will grow in the near future. A report issued January 25 by UK PharmaVentures, however, showed a 16% drop in licensing deals worldwide during 2011. That trend may be driven by the fact that there was a 30% increase in M&A deal values during 2011. Companies with the money looking to boost their R&D pipelines as well as marketed portfolios seem to have decided to buy their way into it instead of follow the licensing route.

That said, pharma is expected to continue its paradigm shift into the world of biologic development while at the same time cutting its R&D budget to protect declining profits due to generic completion. All this will keep its appetite for new technologies growing and ensure plenty of licensing, contract research and manufacturing, as well as open-source opportunities. It will be up to biologic firms and academic centers to prove that they can be the efficient R&D engines that pharma is looking for.

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